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Iran 2011 | ECONOMY | INTERVIEW

TBY talks to Dr. Behrouz Alishiri, Vice-Minister of Economic Affairs and Finance and President of OIETAI.

Behrouz Alishiri
BIOGRAPHY
Dr. Behrouz Alishiri is currently the Vice-Minister of Economic Affairs and Finance and President of OIETAI.

According to the latest World Investment Report, foreign direct investment (FDI) in Iran has increased from $1.5 billion in 2008 to $3 billion. How would you explain this rise, especially considering the recent global economic downturn?

Considering that the average worldwide FDI figure was down 37% in 2009, our increase in FDI is indeed exceptional. Most developing countries did not receive any eye-catching amounts of FDI. Iran was ranked sixth worldwide for inward FDI growth in 2009, with an 86% increase in the volume of FDI compared to 2008. Nevertheless, despite this significant growth I don't think that the volume of FDI in Iran corresponds to the rate of growth, the ongoing development of the Iranian economy, or the size of the national economy. In other words, $3 billion in FDI is not really a great figure for a country of our size with a GDP of more than $380 billion that is ranked as the world's 26th largest economy. There is still plenty of room for FDI growth.

Do you think the rise in FDI is related to Iran's newly evolving private sector?

Until recently Iran was a state-dominated economy. We are still at the starting point in our efforts to foster the private sector, and this is where the main players in the economy have the chance to shine. We need a strong private sector that has the strength, skill, and experience to be able to bargain and cut deals with foreign investors. The bargaining power of the country now comes from the private sector. The stronger the private sector, the better it will be able to bargain and interact in the global arena. If, for example, you look at foreign investment in Turkey, you will find that the growth of the Turkish economy coincided with privatization. Now you find that those huge Turkish firms that attracted foreign investment into Turkey have turned into investor companies in other countries. Turkey's exports in services alone have reached $100 billion. A few years ago it was less than $3 billion. So in short, the more companies learn to stand on their own feet, the bigger the responsibilities and roles they will be able to undertake.

What role has the government taken in the development of the private sector?

When we first decided to privatize the economy we tried to find the key players and companies that could lead the way. The capacity of a country is not just its population and natural resources, but it also lies in the capacity of its business people. So as we continue to develop our private sector, I am sure we will play a more dynamic role in both the local and global economy. Our job is to provide the necessary incentives and economic stimulus to expedite the effective implementation of the privatization process and to facilitate private sector growth in Iran. We are required, for example, to give some soft, concession-like loans to the private sector. We are also required to take measures to avoid monopolization in the economy, and provide the right conditions for a competitive private sector. A “Competition Council" has been designated by the President to oversee this process. Furthermore, as per the law, the government agencies responsible for granting the licenses and permits required by the private sector are obliged to respond in written form to applicants in less than 10 days and issue the licenses and permits within one month from the date of receiving full documentation. If these time limits are violated, companies have the right to file a complaint against the state agencies involved. We at OIETAI and in the Ministry of Economic Affairs and Finance are in charge of following up these issues. In the past, we didn't have these kinds of measures and mechanisms at all.

Have you found yourself having to intervene to move the privatization process forward?

Yes, we have, because state bodies and organizations have to know that from now on the private sector is the center of attention and they must adjust their activities accordingly. For example, we actually reviewed the complaints against some deputy ministers. It was very unusual that a state body would put the private sector before another state organization and take sides against them and in favor of the private sector. The deputy minister had to answer for his negligence in that instance, and we believe that these measures will help change the general mindset in Iran as the private sector continues to grow and strengthen.

What do you think are your responsibilities and duties to the private sector?

We need to deliver some messages to the private sector. Firstly, private sector representatives must not only know but also be sure that whatever they need—be it licenses or permits or the like—they can get it, and get it quickly. Secondly, they should know that the red tape is being cut and that the legal and bureaucratic procedures are becoming less and less time-consuming. Thirdly, they must know that we are doing all we can to reduce costs and facilitate the paper work for any company that wants to go into manufacturing or set up a production facility. In short, our responsibility is to help foster, facilitate, and provide a business environment in which the private sector can grow unhindered. Our World Bank rating has improved greatly in the last two years, and our aim is to improve on that.

What about the issue of subsidies in Iran? How does the heavy subsidization of the economy affect the development of the private sector?

We aim to target subsidies as this is a major issue. Our previous state-centered economy granted a lot of subsidies. In fact, the annual subsidies equal our entire revenue from oil exports every year. So there are two aims to targeting subsidies: firstly, that the subsidies should go only to those who need them the most, i.e. the deprived, the poor, and the needy; and secondly, that resources are freed up so the government can spend them only when necessary and according to its priorities.

We must also consider the huge gap between supply and demand in the Iranian economy. Our manufacturing industry is not large enough, so that once a new product is introduced into the market there arises huge demand that cannot be satisfied. That's why foreign investors can make a huge profit in Iran to an extent that is incomparable to virtually any other country in the world. There are many examples of foreign investors that have made such levels of profit in Iran that those profits have fueled and paid for their expansion on the global market. These all go into answering why there was growth in FDI in Iran when there was such a large global downturn. That's also why I believe that $3 billion in FDI is a very small amount for Iran. I think, with some small amendments, we could easily increase that FDI figure to $30 billion a year.

Besides legal and technical support, do you have more "hands-on" operations where you and your organization can interact with foreign investors?

Yes, in fact we've made great strides in improving our administrative support infrastructure in Iran. After all, to transform the economy, administrative reforms are just as important as economic or legal reforms. For example, we have created Foreign Investment Services Centers in Tehran and in the capital cities of all our provinces. These operate as sort of one-stop shops, and they've been a great help to investors. The aim is to support investors through an entire project, from the very idea of the project right up to its physical realization. These centers do both before-care and after-care services. They are like mini-consultation bureaus and their task is to answer and find solutions to any problems that maybe encountered by foreign investors, even after the project is up and running. We also have two websites: www.investiniran.ir and Iran Investment Opportunities at www.iio.ir, which we launched about a year ago as a bridge between foreign investors and us. On the website you can choose the sector you're interested in and find out about the detailed profiles for the investment opportunities in that sector along with everything you need to know, from legal matters right down to the application form you need to fill out, and all of it is available online. The rules, laws, and regulations are available in 12 languages. This site has been a great help for us. It's been our link to the investor community. Up until now about 6,000 projects have been brought to us, of which we have selected around 600 that are now ready to be presented to foreign investors.

Have you been able to get the word out on the global market about the investment opportunities in Iran?

We have been working on marketing and also on developing bilateral negotiations with different countries. We hold seminars to introduce Iranian investment opportunities in at least 12 different countries each year. The most recent seminars were held in countries such as China, Qatar, India, Malaysia, South Korea, Singapore, Portugal, and Turkey, and they were very successful. We also held a forum in Europe, and since that forum four missions have been sent to Iran.

Has there been sufficient investment in infrastructure projects in Iran?

Infrastructure projects are crucial in terms of attracting and developing foreign investment. Railways, road construction, airways, metros and subways, public transport, power plants, dams, the food industry, telecommunications... all of these sectors have up until now relied solely on the state budget. FDI in these kinds of infrastructural projects has not been significant, unfortunately. This is where we want to bring FDI in. We plan on using the PPP (public-private partnership) model, which we've been promoting in various forums. We offer PPP training for relevant managers and directors, and they've responded very well. If we can undertake these infrastructural projects within the appropriate financial model, I believe we can increase foreign investment in Iran tenfold. But because domestic administrations don't have the requisite experience, the transition hasn't occurred. Until now all government executing agencies simply rely on the state budget or foreign debt financing, but we want to convert that reliance on debt to FDI in these projects so that they become more economically feasible.

Which PPP model will you apply in Iran?

It depends on the type of project. For example, power plants are mostly done through BOT (build-operate-transfer), or BLT (build-lease-transfer) models. Others are done through BOO (build-own-operate) models or some advanced contractual agreements. Sometimes we need to be innovative and create unique models. I'll give you an example: Imagine we have a dam construction project that requires an investment of $100 million. In the past there were two ways to do it, either by allocating a budget and paying for the project step by step, or through financing. But in the financing model, the financial institutions that finance the project make more profit than the host country. Now, however, we break that $100 million into separate parts, so that, say, $20 million comes from the private sector, $30 million may come from the government as a subordinate concession loan, $20 million could be contributed by our commercial banks, and the remaining $30 million can be contributed by local partner companies. This model frees the government of $70 million in resources—70% of the project's cost. So the government can then finance three other projects with the same money it would have needed for just one project. Also, with private involvement, efficiency and productivity increases, and the project is completed on time.

When you receive a foreign investment application, what criteria do you consider to provide it with FIPPA (the Foreign Investment Promotion and Protection Act) status?

I believe the law we instituted in 2002 concerning this subject is one of the smoothest and most advanced laws in the world. According to it, foreign investors can be involved in all sectors that the Iranian private sector is involved in. Secondly, all privileges and advantages granted to the domestic private sector are also granted to foreign investors with no discrimination. A third criterion is that there is no limitation on the size of the investment and that a project can be 100% foreign-owned. Our recommendation is that foreign investors have links with the domestic private sector, but we don't insist on this. However, in the model we're going to apply, we believe there must be some kind of concession to foreign investors involved in joint ventures with local private sector firms. We haven't prepared these incentives yet, but we are working on them. We are also working on incentives that will make joint projects with local companies a more attractive option compared with 100% owned by foreign investors, the reason being that this would facilitate technology transfer into Iran.

On top of those criteria, we also ensure that the capital account is open for foreign investors so they can repatriate their profits. So, for example, if in a time of crisis the government tries to limit a company's capital account, it could not do so for foreign investors. Another criteria is that there are no limits on imports or exports. This means that once we issue a license to a foreign investor, they don't need any other licenses to be able to import or export. Additionally, any Iranian living overseas who invests in Iran can do so under the status of a foreign investor. So, as you can see, foreign investors get a very good deal in Iran, something Iranian companies complain to us about because sometimes they don't receive the same privileges.

How about the tax system? Have you made changes there too?

Yes, we have amended the previously complicated and ambiguous tax system. The corporate income tax is a flat rate of 25%, though in some sectors we grant further incentives and exemptions. In the manufacturing sector, for example, foreign investors have a tax exemption on 80% of their income for the first four years. So if the company's balance sheet showed that it had incurred a loss in those first four years, it is exempted from tax. For those investing in less developed areas of the country, the tax exemption goes up to 100% of corporate income. In free zones, 100% of income is exempt from tax for 20 years. The agricultural sector is permanently exempt from tax. In tourism 50% of income is tax-exempted, while in exports it is 100%. As for customs, all new imported machinery is exempt from customs duties. Raw materials are also exempt from duty, if they are to be utilized for exported products.

Why have all these government initiatives for developing the Iranian private sector taken place in the last two years? Why 2008?

First of all, a state-owned economy does not attract FDI. You cannot take off and fly when you are heavy. You have to lighten your load. Although there is a privatization effort in Iran, we are not moving toward a liberal economy, and there is no place for speculation here. We issue bonds, but they are Islamic bonds, or sukuk, which don't create any speculative crises because they are paid out in real assets. So although we are moving toward privatization, we are not moving in a direction that would allow for capital accumulation. For a long time there was no consensus in Iran on how the privatization of the economy could work. It took years for us to reach consensus, and it was only by 2008 that it became law. This kind of transition isn't unique to Iran; we are seeing it all around the world.

What does the near future hold for the Iranian economy?

Iran is a unique economy. We have a very diverse agricultural sector, with the fourth most diverse agricultural production in the world. We have one of the most advanced petroleum industries, the second-largest gas reserves, and are the fourth-largest producer of oil in the world. There are amazing historical treasures. Iran stands among the industrial powers of the region with its reserves of commodities such as zinc, cobalt, and manganese, that makes us fourth to ninth in the world for these mineral reserves. On top of that, we have one of the most educated and low-cost labor forces in the world.

You cannot find this kind of potential and wealth of both human and natural resources anywhere else in the world. So half the job is already done. We now have to accomplish the remaining half. In terms of developing foreign economic cooperation, our primary focus is on regional cooperation, even though we are open to all foreign cooperation, be it from Latin America, China, or elsewhere. But our first focus is the region we live in. If regional neighbors need access to our energy resources, then our priority is to those neighbors. Our objective overall is stability and security for the region, because that means stability and security for us as well.